The Effects of Government Ownership on Bank Lending

This paper studies the effects of government ownership on bank lending behavior. Using information on individual loan contracts, I compare the interest rate charged to two sets of companies with identical characteristics borrowing respectively from stateowned and privately owned banks. State-owned banks charge lower interest rates than do privately owned banks to similar or identical firms, even if the company is able to borrow more from privately owned banks. State-owned banks mostly favor firms located in depressed areas and large firms. The lending behavior of state-owned banks is affected by the electoral results of the party affiliated with the bank: the stronger the political party in the area where the firm is borrowing, the lower the interest rates charged. This result is robust to including bank and firm fixed effects. ∗I am indebted to Andrei Shleifer for guidance and encouragement. I also thank Alberto Alesina, Paul Armstrong-Taylor, Richard Caves, Riccardo DeBonis, Xavier Freixas, Anil Kashyap, Randy Kroszner, Patricia Ledesma, Anna Paulson, Luigi Zingales, an anonymous referee, and seminar participants at 1999 European Symposium in Financial Markets, NBER Universities Research Conference on Macroeconomic Effects of Corporate Finance, American Finance Association, and the Federal Reserve of New York for helpful comments and suggestions. Laura Pisani provided excellent research assistantship. All remaining errors are my responsibility. La Porta et al. (2002) document that worldwide, there is a large, pervasive government ownership of banks. In 1995 the average percentage of state ownership in the banking industry around the world was about 41.6 percent, and somewhat lower (38.5 percent) if we exclude former socialist countries. Mayer (1990) shows that bank financing is the main source of outside financing in all countries. Despite the prevalence of government-owned banks in many countries, the prominent role of banks in financing enterprises, and the importance of efficient financial markets for growth, there is very little evidence of the effects of government ownership on bank lending. In this paper I use a unique dataset on state-owned banks in Italy, where lending by state-owned banks represents more than half of the total. By using data on interest rates charged on individual loans, the paper studies the efficiency in the allocation of credit of state-owned banks. Furthermore, I combine data on lending with the political affiliation of the bank and results in recent elections to study the impact of political power on bank lending behavior. The debate concerning the role of ownership in banking is framed along the three alternative theories of state-ownership, social, political, and agency views. The social view (Atkinson and Stiglitz (1980)), which is based on the economic theory of institutions, suggests that state-owned enterprises (SOEs) are created to address market failures whenever the social benefits of SOEs exceed the costs. According to this view, government-owned banks contribute to economic development and improve general welfare (Stiglitz (1993)). In contrast, recent theories on the politics of government ownership (Shleifer and Vishny (1994a)) suggest that SOEs are a mechanism for pursuing the individual goals of politicians, such as maximizing employment or financing favored enterprises. The political view is that SOEs are inefficient because of the politicians’ deliberate policy to transfer resources to their supporters (Shleifer (1998)). The agency view shares with the social view the idea that SOEs may be created to maximize social welfare, but may generate corruption and misallocation (Banerjee (1997) and Hart, Shleifer, and Vishny (1997)). Agency costs within government bureaucracy may result in weak managerial incentives in SOEs. According to this view, the ultimate efficiency